GEORGE SOROS - "Economic history is a never-ending series of episodes based on falsehood and lies, not truths. It represents the path to big money. The object is to recognize the trend whose premise is false, ride that trend, and step off before it is discredited"

Sunday, March 16, 2014

Be Smart. Think Smart. Act Smart.

The most interesting fact about market is we always see and read or hear numerous explanation for certain past events. Rationale seem to be logical yet contradictory. Many and majority of the market participants are not wise enough to understand that market is a product of human emotional behavior. It is difficult to quantity such behavior and develop a perfect fit error free system to trading or investing decision making.

Dealing with human behavior means we are subjected to both linear and NON-linear activity. If the market is a product of linear activity (decision making), programming error free and perfect fit system is easy and achievable. The inclusion of NON-linear actions parameter alter the model drastically. Unless someone is able to develop a system that has the algorithm to process both premises, any mechanical system today is NOT Perfect and will oscillate between profit and losses.

The crucial questions one has to address are WHAT IS THE OBJECTIVE OF THE SYSTEM and WHAT IS THE SYSTEM SUPPOSE TO MEASURE before we even think about developing any system. How can the system aid the user? Is the system meant to flash trigger and signals irrespective of the risk reward? Can the system measure risk reward for each signal?

In summary, quantifying risk reward ratio refers to our assessment of a trend in motion from the start to the end of a trend.

1.How do you know the current trend is ending?

2.How do you know a new trend has just started?

3.How do you know the current trend is not midway to the destination?

4.How do you know the current trend is more than midway to the destination?

If you have a system than can answer all the 4 questions above, you can easily determine and quantify your risk reward ratio. You have develop a reliable and profitable system. With this system, you are no longer walking in the dark. You are using a laser pointed weapon to shoot.

It is possible to develop a system that can answer all the 4 questions above. This lead us to the conclusion that decision(s) is no longer high risk but "contained quantified" risk.

One does not need a system that can pin-point the exact time and level the market bottoms or peaks. All you need is a system that can help you consistently enter or take position with favorable rewards and low risk. This is what a smart business person will and should do.